Barron’s - USA (2020-09-28)

(Antfer) #1

September 28, 2020 BARRON’S 7


Of course, Al Gore and Hillary Clinton won


the popular vote in 2000 and 2008, respec-


tively, but lost in the Electoral College.


This model shows the current race


tighter than the polls, which have Biden


leading Trump by 6.5 points, down by


about a point in the past month, according


to the RealClearPolitics Poll Average. But


“Trump’s trend has been falling in Septem-


ber, with equities selling off and the dollar


rising,” according to a Strategas client note.


That’s just a snapshot of the current


conditions, they emphasize. The race’s


tightening coincides with fewer new


Covid-19 cases, shifting voters’ attention to


the economy, the Supreme Court, and law


and order, they add. But a renewed flare-


up in Covid could move the emphasis back


to Trump’s handling of the pandemic.


If 2020 has shown anything, a lot can


change in a month.


P


olitics might be more of a


sideshow to the real busi-


ness of the economy, which


is driven primarily by credit.


Housing is booming, with


sales of existing homes run-


ning at an annual rate of 6


million units in August, while new home


sales topped the 1 million yearly rate, the


highest level since 2006, with sales of both


constrained by lack of supply. It’s not just


the flight from cities to the suburbs that’s


causing the trend, but cheap mortgages,


with 30-year conventional fixed-rate loans


averaging 2.90%, according to Freddie Mac,


just a hair above the record low of 2.86%


touched earlier in the month.


Speculative-grade corporations also


have been feeding at the credit trough.


Even before the third quarter ended, junk-


bond issuance set a new yearly record,


topping 2012’s mark of $329.6 billion this


past week, Bloomberg reported. But there


are signs that the boom may be quieting


down, at least for now.


High-yield bond funds saw outflows of


nearly $5 billion in the week ended Thurs-


day, the biggest exodus since last March,


when the capital markets were in near-melt-


down before the Fed came to the rescue.


High-yield spreads—the risk premium for


speculative-grade credits—widened by 40


basis points, to 547 basis points, Bank of


America credit strategists Hans Mikkelsen


and Yunyi Zhang write in a client note. (A


basis point is 1/100th of a percentage point.)


One speculative-grade borrower that


made it to market this past week was Car-


vana (ticker: CVNA), which issued $1.1 bil-


lion in notes a day after its stock popped,


following strong guidance for the third


quarter, in which it said it expected to break


even on Ebitda (earnings before interest,


taxes, depreciation, and amortization). Car-


vana had to pay 5.625% on a five-year issue


and 5.875% on an eight-year maturity.


Carvana also has been a beneficiary of


other parts of the credit market, securitizing


loans on the used cars it sells in its “vending


machines” to those smiling millennials in


their jammies seen on its television com-


mercials. According to an asset-backed


securities offering rated by Kroll Bond Rat-


ing Agency earlier this year, the $480 mil-


lion issue wascollateralized by$495million


of auto loans to borrowers with an average


FICO score of 554—scores that low are con-


sidered subprime—who paid an average


rate of 19.20% on loans with an average


original term of 71 months.


Kroll rated the various classes of ABS


from AAA to BB, owing to various credit


enhancements. If all goes as planned, the


top AAA tranche gets paid off, while the


bottom BB absorbs any losses. Meanwhile,


CEO Ernest Garcia III and his father, Er-


nie Garcia II, Carvana’s largest share-


holder, were worth $21.4 billion after the


stock’s pop Tuesday, Bloomberg reported.


But away from the capital markets,


there are signs of tightening credit, accord-


ing to a report from Macro Intelligence


Partners. Banks have been imposing more


stringent standards for borrowers, espe-


cially for consumers, a change borne out


by the Fed’s Senior Loan Officer survey.


With banks’ net-interest margins shrink-


ing as a result of Fed rate cuts, the percent-


age of them tightening credit-card standards


is higher than it was during the dot-com


bubble or the Great Financial Crisis. Some


also are reducing credit limits. MI2 notes


that Capital One Financial (COF), the


third-largest card issuer, trimmed limits by


as much as two-thirds after the expiration of


the $600 weekly supplemental unemploy-


ment payments from the Cares Act.


Especially vulnerable is subprime auto


lending, MI2 added. In the second quarter,


loans delinquent for 60 days jumped to


7.24% of subprime loans outstanding, from


4.4%, “within spitting distance of GFC


[Global Financial Crisis] extremes.” At the


same time, the report noted a downturn in


the Conference Board’s consumer confi-


dence question about auto-buying plans.


“The bad news is until we get through the


election, we are dealing with a partisan and


highly dysfunctional government, which is


why credit matters!” MI2 concludes.B


email: [email protected]


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